A Model For Calculating Minimum Surplus Requirements

Over the past several years a number of insurance companies have been formed by doctors, hospitals and lawyers to insure professional liability coverage. These companies typically operate in one state and write primarily one subline of insurance (i.e., professional liability). In addition, these companies may insure only a few thousand doctors, lawyers or hospital beds. A significant consideration in the formation of these companies is the amount of surplus required to establish a viable insurance operation. This paper describes a method of calculating a minimum amount of required surplus. In this paper the term "surplus" includes both capital and surplus, as does the common term "policyholder's surplus." The approach is adapted to insurers that write one line of business. For multiple-line carriers there are additional important considerations (such as covariation between the different lines) and also aspects that have much less significance (such as skewness and uncertainty in the adequacy of the rate level). This method may also be useful for estimating surplus requirements for captive insurers and analyzing the fluctuation in the underwriting experience of self-insurers.